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Entrepreneurial Financing, Advice, and Agency Costs

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  • Roland Strausz

Abstract

"We develop a model to study the interplay between advice and agency costs in entrepreneurial financing. We demonstrate a tension between the entrepreneur's motivation for effort and the investor's willingness to finance the project. Advice to the entrepreneur exacerbates this tension. Consequently, optimal financing contracts may involve full, partial, or no advice. With partial advice, information flows need to be controlled carefully. Such control is better when advice and finance are integrated as observed by venture capitalists." Copyright (c) 2009, The Author(s) Journal Compilation (c) 2009 Wiley Periodicals, Inc..

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

Volume (Year): 18 (2009)
Issue (Month): 3 (09)
Pages: 845-870

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Handle: RePEc:bla:jemstr:v:18:y:2009:i:3:p:845-870

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Web page: http://www.kellogg.northwestern.edu/research/journals/JEMS/

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  1. Bergemann, Dirk & Hege, Ulrich, 1998. "Venture capital financing, moral hazard, and learning," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 703-735, August.
  2. Bester, Helmut & Strausz, Roland, 2001. "Contracting with Imperfect Commitment and the Revelation Principle: The Single Agent Case," Econometrica, Econometric Society, vol. 69(4), pages 1077-98, July.
  3. Inderst, Roman & Mueller, Holger M, 2003. "Credit Risk Analysis and Security Design," CEPR Discussion Papers 3686, C.E.P.R. Discussion Papers.
  4. Schmidt, Klaus M., 2003. "Convertible Securities and Venture Capital Finance," Munich Reprints in Economics 19769, University of Munich, Department of Economics.
  5. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  6. Schmidt, Klaus M., 1999. "Convertible Securities and Venture Capital Finance," CEPR Discussion Papers 2317, C.E.P.R. Discussion Papers.
  7. Admati, Anat R & Pfleiderer, Paul, 1994. " Robust Financial Contracting and the Role of Venture Capitalists," Journal of Finance, American Finance Association, vol. 49(2), pages 371-402, June.
  8. Steven N. Kaplan & Per Stromberg, 2002. "Characteristics, Contracts, and Actions: Evidence from Venture Capitalist Analyses," NBER Working Papers 8764, National Bureau of Economic Research, Inc.
  9. Manove, Michael & Padilla, A Jorge & Pagano, Marco, 2001. "Collateral versus Project Screening: A Model of Lazy Banks," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 726-44, Winter.
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